WORKSHOP (IYSW)
3 AUGUST 2011
KYOTO UNIVERSITY, JAPAN
CHARACTERISTICS OF FDI
CONTRIBUTION TO VIETNAM
ECONOMY AND GOVERNMENT’S
POLICY TO ATTRACT INWARD FDI
SELECTIVELY.
Presenter: Mai Hai Sam
Vietnam National University
Content



1. Outlook of inward FDI in Vietnam

1.1. FDI by investors

1.2. FDI by geographic structure

1.3. FDI in ownership
2. Contribution of FDI to Vietnam economy

2.1. Grossed fixed capital

2.2. GDP growth

2.3. Business structure

2.4. International trade capacity
3. Vietnam country’s factors to attract FDI

3.1. Political Stability

3.2. Rule of Law

3.3. Competitive investment cost

3.4 Corruption freedom

4. Recommendation on government policies to attract FDI

5. Conclusion
1.Outlook of inward FDI in Vietnam


From 1995-2004, foreign investors were
attracted by the potentiality of a
transitional economy

Vietnam officially joined ASEAN (1995)

Agreement of Cooperation and Development
between Vietnam and EU (1995),

A bilateral trade agreement (BTA) between
Vietnam and the United States (2001).
However, from 1997 to 1999, a sharp
fall in FDI inflows to Vietnam, mainly as a
result of the Asian financial crisis (1997)
and the unattractiveness of Vietnam’s
investment environment relative to other
regional countries, especially China
Figure 1 . Vietnam FDI in selected years ( Unit: Millions of USD)
Source: UNCTAD, World Investment Report 2011
Outlook of inward FDI in Vietnam




From 2005-2007, Vietnam has witnessed
the strong comeback of FDI

The Law of Foreign investment in 1996 was
also revised, taking out some favors to
foreign investors since it generated unequal
competitive environment between domestic
and foreign investors.

This upsurge in performance indicates a
great interest from foreign investors,
especially since Vietnam became the 150th
member of the World Trade Organization
(WTO) in 2007.
The year 2008 was a particularly good
year for Vietnam to attract FDI.
Vietnam FDI in selected years ( Unit: Millions of USD)
Source: UNCTAD, World Investment Report 2011
Dip in 2009 and 2010 due to global
crisis (2007) and other internal and
external reasons
However, it satisfied Vietnam authorities’ plan while Vietnam Ministry of Planning &
Investment (MPI) set the FDI target of year 2009 to attract almost a half of actual in year
2008
1.1.FDI characteristics by investors
Foreign investors in Vietnam (1999-2010)
Share of reg. cap.
From 1990-2009
Share of reg. cap.
From 1990-2010
Reg. FDI of 2007-2010
compared to 1990-2006 (%)
SEA
40,18
39,8
193,9
ASEAN
23,22
26,3
213,5
Tax haven*1
15,48
12,8
124,52
Europe
8,97
6,4
31,6
USA, Canada, Australia
11,57
9,8
330,36
Others
0,58
4,9
Territory
Source: Created from data of GSO Vietnam
SEA includes: Japan, Korea, HongKong, Taiwan and mainland China.
*1. Tax havens are states or countries or territories where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.
In this research, taz havens are defined according to OECD including British Virgin Islands, Cayman Islands, Bermuda, Channel Islands, Cook Islands, Island of Man, Barbados, Belize, Bahamas
, Samoa, Panama, Mauritius, Sain Kitts Nevis, British West Indies, Cyprus…



European investors reacted weakest during recent 3 years after Vietnam’s full participation in
ASEAN (1995)
While USA, Canadian, Australian investors’ capital injected into Vietnam during 2007-2010
took 3 times more than total registered capital in last 15 years
It’s noted that capital coming from tax haven territories has been originated from
multinational corporations (MNEs) who set up their fund subsidiaries in these tax haven.
1.1.FDI by investors (cont.)

Taiwan is the biggest foreign investor (11,8%) with US$ 22,7 billion of registered
capital, followed by Korea, Singapore, Japan. These top five economies have
invested with total committed capital of US$ 87,6 billion (45,6 % of the total FDI
capital).
Top 20 foreign investors in Vietnam from 1990-2010
US’s
investment
capital
doubled
their direct
registed
capital
(MPI/ FIA
and
USAID/STAR
, CIEM and
FIA, 2007)
Source: Vietnam partner data, 2011
1.2. FDI by geographic structure

Foreign investments concentrated geographically in key economic areas in the South ( 65% of
total investment projects and 57,7% of registered FDI capital) and North due to wellimproved infrastructure, good sea ports, international airports, acceptable costs for
employees, office and accommodation
FDI in Vietnam provinces up to 2002
City/province
Baria-VungTau
Project (%)
Capital (%)
2.36
4.73
BinhDuong
16.44
7.05
DongNai
10.54
13.73
HoChiMinh city
34.11
26.56
LamDong
1.60
2.20
QuangNgai
0.15
3.44
ThanhHoa
0.21
1.15
HaiDuong
1.12
1.30
HaiPhong
3.20
3.38
HaNoi
12.30
20.42
Others
17.98
16.05
100
100
Total
Source: Vietnam Investment Review, No 563/July 29-August 4, 2002.
1.3. FDI in ownership
The increasing FDI contribution seemed to motivate the increasing domestic investment as well
with the stable share in about 22% average in foreign investment and higher rate from 24% to
36,4% among private sectors in 1996-2000 and 2006-2009 respectively
1.3. FDI in ownership (cont)
Share of foreign invested enterprise (Unit: %)
Year
2000
2003
2005
2007
2008
Small size
60,85
62,66
64,27
65,94
66,52
Medium size
13,25
11,36
9,85
9,99
9,99
Large size
25,9
26,69
25,89
25,02
23,5
FIEs/Total Es
3,61%
3,67%
3,27%
3,18%
2,74%


2009
Parent TNCs
China
3.429
Taiwan 606
Vietnam 4
2,65%
Total invested TNCs
286.232
3.034
326
Source: UNTCAD, 2008
Foreign investors increasingly prefer the wholly owned form for their investment after learning
the various difficulties occurring by operating a JV with Vietnamese counterparts
These enterprises came to Vietnam not directly from their parent corporations, but from their
affiliates or branches from the third countries into Vietnam.
2. Contribution of FDI to Vietnam economy
2.1. Grossed fixed capital


FDI has been an important
supplementary source of funds for
gross fixed capital and improved
the balance of payment for the past
years.
The event of Vietnam becoming
member of WTO in 2007 made
implemented FDI accounting highly
again for over 30 percent
• sfsf
Source: Created by author from data of CIEC, World Development indicators, World Bank (2009) and UNCTAD, World Investment Report 2011
What’s your best guess?
2.2.Contribution of FDI to GDP growth


Evidently, Vietnam economic growth during these recent 5 years has been based on
foreign investment more than in the past.
Vietnam was one of very few countries to reach plus growth in the context of global crisis
leading to economic regression in many countries, only following China in region (IMF
2011 Article IV report)
FDI stock situation in Vietnam (Unit: Millions of USD and %)
Year
Inward FDI stocks Vietnam
Share of gross domestic product Vietnam
Inward FDI stocks SEA
Share of gross domestic product SEA
1995
7.150
34,5
2000
20.596
2008
49.854
55
2009
57.454
61,7
2010
65.628
66,1
152.403
22,4
266.291
661.143
44,1
746.258
50,7
938.401
51,5
Source: UNCTAD, World Investment Report 2011
What’s your best guess?
2.3. Contribution to business structure


The sectors which attract higher inflows were
light and heavy industry and services (30%
each in 2007)
However, FDI in agriculture, forestry and
fishing is under-proportionate compared to
the importance and huge potential of these
industries in Vietnam.
• sfsf
Source: Annual Statistical Books 2006-2009.

Industry: crude oil, light industry, heavy industry,
foodstuff, construction

Agriculture: agri and forestry, aquatic

Service: transport and telecoms, hotel and tourism,
finance and banking, culture, health and educ, new
cities, offices and apartment
Source: Vietnam partner
What’s your best guess?
2.4. Contribution to International trade capacity


With foreign investors increasingly
attracted to export-oriented industries,
FDI has played an important role in
export growth, especially after the crisis
in 1997
Beside motivating export from domestic
companies, FDI certainly has impacts on
domestic firms’ effectiveness in export,
making the market become more
competitive.
Contribution of FDI to Export (bil USD)
Source: Vietnam Ministry of Trade
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total Export
5,45
7,26
9,19
9,36
11,54
14,48
15,03
16,71
20,15
26,5
Export by FIEs
1,47
2,16
3,21
3,22
4,68
6,81
6,8
7,87
10,16
14,49
Contribution
to export(%)
27%
30%
35%
34%
41%
47%
45%
47%
50%
55%
2.4. Contribution to International trade capacity

FDI accelerate export more quickly than import, leading to unbalance in trade balance as well.
Vietnam Balance of Payment, 2007-12
In billions of USD
2007
2008
2009
2010
2011
Projecte
d
-10,3
-12,8
-8,3
-7,1
-7,6
Export,
F.O.B
48,6
62,7
57,1
72,2
89,4
Import,
F.O.B
58,9
75,5
65,4
79,3
97
Investment income
-2,2
-4,4
-3
-4,6
-4,7
Receipts
1,1
1,4
0,8
0,5
0,6
Payments
3,3
5,8
3,8
5,1
5,3
Current account balance
Trade balance
Source: IMF 2011 Articale iV report, p24
3. Vietnam country’s factors to attract FDI


Empirical researches using an institutional theoretical approach have emphasized the
study of institutional quality, political risk, bilateral investment treaties, foreign
investment and trade regulations, and capital markets liberalization to explain flow of
FDI (Busse et al., 1996; Habib & Zurawicki, 2002).
The flow of FDI into Vietnam is related to these simultaneous satisfied institutional
quality conditions:

(1) The Political Stability

(2) Rule of Law

(3) Competitive investment cost

(4) Corruption Freedom

Still, there are other variables such as bilateral investment treaties, foreign investment
and trade regulation, and capital markets liberalization to attract FDI, which should be
further evaluated in future research.
Vietnam country’s factors to attract FDI
3.1. Political Stability


A big concern of developing countries to express themselves as a stable government
and as a security state to ensure investment (Agarwal & Feils, 2007; Brada et al., 2003;
Trevino & Mixon, 2004; Zitta & Power, 2003);
Political and social stability is strength of Vietnam. There are in Vietnam less problems
related religions, languages or ethnic disputes, and the safety of foreign direct
investments is guaranteed
Vietnam country’s factors to attract FDI
3.2. Rule of Law
Comparison of Vietnam’s foreign ownership commitment among regional and global countries
Segment
New
M&A
investment
Vietnam Region
Globe
50
75,7
92
100
75
50
82,9
86,8
64,9
95,9
96,6
88
71,4
75,8
87,6
65
100
69,4
0
100
75,5
76,1
80,9
63,7
36,1
91,6
84,1
91
91,2
78,5
68
98,1
96
Fuel
Coal
Oil and gas
Agriculture- forestry
Light industry
Telecommunication
Electricity
Electricity transfer
Banking
Insuarance
Transportation
Media (Journal & Television)
Construction, Tourism and service
Pharmacy and clean water management
100
0
100
100
49-51
100
0
100
100
49-100
0
100
51-100
100
0
100
100
49-51
100
0
30
100
49-100
0
100
51-100
Source: Investing Across Borders 2010, World Bank and Vietnam Foreign Investment Law


Vietnam government has endeavored to undertake market reforms for more attractive to FDI open
better investment climate and get closer to regional commitment.
The amended Law of Foreign Investment was to improve its investment climate, and thus to compete
with other regional economies
Vietnam country’s factors to attract FDI
3.3 Competitive investment cost
Comparison of investment-related cost among ASIA (10/2011- Unit: USD)


Source: Japan External Trade Organization (JETRO), 2011, p66-71
According to a survey conducted by the
Asian Business Council, Vietnam ranked
third for investment attraction among
Asian nations in the 2007-2009 period,
after China and India (VIR, 2007)
Due to lower costs for labor, land rent,
telecommunications, power and water
supplies, Việt Nam is in better position
than regional countries (JETRO, 2010).
Vietnam country’s factors to attract FDI
3.3. Competitive investment cost
Comparison of investment-related cost among ASIA (10/2011- Unit: USD)
Investment-related cost
Non-manufacturing staff's
salary/actual annual
Danang HCMC
Hanoi Jakarta ManilaBangkok Beijing Shanghai Kuala L
3.205
5.638
5.954
5.333
5.737
9.806 11.270
12.154 14.460
Engineer's salary/actual annual
2.724
4.574
5.194
6.082
6.841
9.778
6.694
10.494 14.827
Worker's salary/actual annual
Office rent/month/sp.m
Electricity rate for general
use/kWh
Housing rent for resident
agent/month
Regular gasoline price/liter
Mobile phone basic
charge/month
Corporate income tax rate (%)
1.816
17
1.891
38
1.733
45
3.247
20
3.897
18
5.125
22
6.107
114
5.609
40
5.615
24
0,07
0,07
0,07
0,09
0,23
0,08
0,07
0,09
0,11
1.025
0,84
2.550
0,84
3.013
0,84
2.950
0,5
1.532
1,11
1.935
1,31
4.629
1,09
2.277
1,08
2,5
25
2,5
25
2,5
25
5
25
41
30
33
30
7,6
25
7,6
25
HK
28.94
9
31.75
0
21.87
8
94
Seoul
Sing
30.73
9 30.835
30.60
9 37.266
24.60
1 22.206
52
67
0,14 0,07
0,20
1.554 2.414 1.795
0,62 1,98 1,79
4.969
1,51
86,9
25
28
16,5
11
16
80,8
17
Source: Japan External Trade Organization (JETRO), 2011, p66-71
Country ranking by inward FDI performance index and inward FDI potential index, 2007-2009
Economy
Vietnam
Inward FDI performance
Inward FDI Potential Index
2008
2009
2010
2008
2009
20
22
22
77
73
2010
Source: UNCTAD, World Investment Report 2011
Note: Ranking is that of the latest year available. Covering 141 economies. The potential index is based on 12 economic and policy variables.
Vietnam country’s factors to attract FDI
3.4 Corruption Freedom



In Vietnam, law enforcement is not consistent and uniform in the country, the law interpretation
and enforcement depend too much on local agencies or lower ranking state officials (JETRO,
2010).
Corruption is a disturbing barrier existing in the institution to increase business cost. If the rule of
Law is not strong enough, it would let corruption surrounding institutional administration.
Therefore, bureaucracy and low transparency are the big weaknesses of the business
environment in Vietnam.
4. Recommendation on government policies
to attract FDI

What are government’s effective ways to attract FDI?

How to keep foreign investors make more long-term investment rather than short-term?
Legal system
Transparency,
accountability and
predictability
Up-grading
infrastructure
Enhanced labor
force by training /
retraining
Improved foreign
investment
regulations
What’s your “to” Statement?
4. Recommendation on government policies
to attract FDI (cont.)


First priority is to adjust the legal system according to the international.

Legal regulations in Vietnam in foreign investors’ assessment are generally fast changing, less predictable and less consistent,
especially in tax, foreign exchange, labor regulation, land and jurisdiction.

Business information has to be provided;

Transparency, accountability and predictability of the public administration must be improved rapidly commitments.

Post-licensing procedures especially on land clearing, foreign exchange, tax and customs must be simplified tangibly.
Secondly, up-grading of infrastructure, especially in power and clean water supply, Internet
connection is one of the top priorities.

Vietnam maintain a competitive investment cost advantage but the quality of some public goods and services is low.

Higher charges and fees for public goods and services like international dial, Internet, seaport fees and others than in
regional level.

Low stability, fluctuating tension, sudden black outs in power supply create significant additional costs for users and prevent
investors to move high-tech investment into Vietnam.

In future policy to attract inward FDI flow, Vietnam should allocate national funds to up-grade its roads, ports and various
areas of infrastructure as well as improve foreign investment regulations in these sectors.
4. Recommendation on government policies
to attract FDI (cont.)


Thirdly, training and re-training Vietnamese labor force

Young, fast learning relatively well-educated labor forces, competitive labor cost are advantages for Vietnam in region

Geographic location, natural resources (oil, gas) are other factors foreign investors will take in consideration to choose a
place for investment.

Therefore, the quality of Vietnam's labor forces must be enhanced in different ways like vocational training, foreign
languages, health and industrial discipline to keep up these competitive advantages.
Fourth, enhance capability of government organization, agent to evaluate inward FDI and
select new efficient foreign investment

FDI has represented an extremely important source of growth for the Vietnamese economy. However, its impacts on
employment and technology transfer have been limited than its potentiality. Even the imposed local content requirements
have not yielded the desired results.

The authorities need to clearly communicate their views of the inward FDI effectiveness in economic situation and provide
economic agents with timely and comprehensive data, withdraw licenses in ineffective FDI projects to provide opportunity
for more potential and capable investors, controlling the project’s land transaction. Projects which may cause pollution to
environment, whose investment-scope is small but use much land and spend a lot of energy will be considered to be
controlled.
5. Conclusion


FDI contributes capitals help accelerate the
government’s development goal and has
been recognized as a major indicator to
promote economic growth.

Inward FDI flows contribute in the form of capital
(to enrich their foreign exchange reserves)

Accelerate export capacity and contribute to
change the economic sector .

FDI sector accounts for an increasing share in GDP.
Vietnam’s restored macroeconomic stability
and efforts to reduce corruption are
significant factors for potential foreign
investors, while incentive policies in the
government’s investment law do not register
as attractive enough for foreign investors
rather than more transparent legal system,
improved infrastructure, enhanced labor
force and local agent capability
5. Conclusion (cont.)


Vietnam still remains an attractive destination for investment due to favorable
economic growth prospects and the implementation of pragmatic economic policies.
FDI outlook for 2011-2012 is projected to grow to USD 7.7 billion and USD 8.5
billion, respectively due to returning interest and confidence by investors who are
investing and doing business in the country (IMF, 2011).
THANK YOU
FOR YOUR ATTENTION !
26